BHP Told Bending to Activists Poses Risks for Debt Investors
BHP Warned Bending to Activists Poses Risks for Debt Investors
(Bloomberg) -- BHP Billiton Ltd.’s new Chairman Ken MacKenzie is grappling with a simmering campaign by activist shareholders -- moving too far to appease them could risk unsettling debt investors who own the world’s biggest miner’s $24 billion of bonds.
The campaign by funds including billionaire Paul Singer’s Elliott Management Corp., could see MacKenzie’s board sanction more shareholder-friendly measures such as buybacks and special dividends, threatening to introduce more volatility to BHP’s credit profile and raising a risk of a rating downgrade, according to Fitch Ratings Ltd. MacKenzie is scheduled to address BHP’s annual meeting Thursday.
“We wouldn’t be overly enthused with ongoing activist shareholder agitation, as these types of actions tend to benefit only one set of stakeholders -- equity holders,” said Garreth Innes, a Perth-based fixed-interest investment manager at Standard Life Aberdeen Plc’s investment arm, Europe’s second-largest active manager. BHP declined to comment.
Activist campaigns can “see capital being stripped out of these businesses which leaves a smaller asset base compared with the debt outstanding,” Innes said in a phone interview. The fund manages more than 580 billion pounds ($775 billion) globally, including BHP shares and bonds. BHP’s Sydney stock declined 2.3 percent Thursday, as Rio Tinto Group fell 2.5 percent.
The following charts examine key issues likely to be discussed at BHP’s meeting:
Activist Campaign
Elliott, the second-largest holder of BHP’s London-listed shares, has been engaged in talks with the miner since about August 2016 and in April went public with demands for strategy changes to address what it argues has been the destruction of about $40 billion in value.
While the New York-based fund has backed 53-year-old MacKenzie’s appointment, Elliott has warned it could call an extraordinary meeting if it’s left dissatisfied with his approach. A renewed focus at BHP, prompted by MacKenzie, should appeal to investors, UBS Group AG analysts wrote in a Wednesday note. The
BHP has in recent months flagged plans to sell or spinoff its U.S. onshore oil and gas division and to delay development of the Jansen potash mine -- actions championed by some shareholders. Chief Executive Officer Andrew Mackenzie, however, insists the decisions weren’t the result of external pressure. BHP has so far rejected Elliott’s calls to collapse its dual-listed structure and to carry out a more sweeping review of its petroleum assets.
Shale Exit
BHP can likely collect as much as $10 billion through sales of its U.S. shale assets and a update at the London meeting would be a potential positive catalyst, Macquarie Group Ltd. analysts said last week. The producer said in August it’s in talks with potential buyers of the assets, acquired in a contentious $20 billion deals spree in 2011.
However, selling the unit will remove some future growth from BHP’s oil division and dilute the diversification the company enjoys compared to mining-focused peers, according to Fitch. “In this respect we see their potential disposal as being a credit negative,” Peter Archbold, a London-based senior director at Fitch said in an e-mailed response to questions.
BHP agreed in the September quarter to divest a small portion of Hawkville acreage, the producer said Wednesday in a statement. The shale unit’s land holdings have dropped to 794,000 net acres from 1.6 million acres in 2012, through sales and swaps.
Project Spending
MacKenzie is likely to use the London meeting, and a second event in Melbourne next month, to set out “clearer guidance on a new plan for BHP that will focus more on shareholder returns and less on growth projects,” Macquarie analysts said in a Oct. 12 note. Plans to develop the Jansen potash project in Canada, with an estimated cost of $12.8 billion, have been delayed amid investor concerns over potential returns and on a weak outlook for the crop nutrient.
While capital and exploration spending is forecast to rise to $6.9 billion in the 12 months to July, from $5.2 billion a year earlier, the new chairman is prioritizing work to toughen criteria on investments, according to BHP’s annual report.
Leadership Changes
Montreal-born MacKenzie is likely debating a succession plan for CEO Mackenzie, in the post since May 2013, investors and analysts said last month. The chairman should either offer the CEO a new, long-term mandate, or refresh the executive line-up as a matter of urgency, according to Sanford C. Bernstein Ltd. analyst Paul Gait. Mackenzie leads a “world class management team,” the chairman said in last month’s annual report, which also disclosed the board discussed executive succession and a “talent pipeline” in the past year.
There are set to be changes to BHP’s board, with Malcolm Brinded stepping down this month and with three other directors having already racked up more than seven years of service. MacKenzie is reviewing the different types of boardroom expertise that may be required in a future expected to feature more price volatility, he said in a letter in the annual report.
To contact the reporters on this story: David Stringer in Melbourne at dstringer3@bloomberg.net, Ruth Liew in Sydney at rliew6@bloomberg.net.
To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Keith Gosman